Tax bands should be scrapped to allow a more progressive system to emerge which could help low and middle earners keep more cash, a new report has suggested.

Public services could also experience a multi-billion pound boost from such an overhaul to the tax system, the Institute for Public Policy Research (IPPR) adds.

The left-leaning think tank recommends income tax and employee National Insurance Contributions (NICs) should no longer exist as separate taxes, instead combined under a single tax schedule which is applied to all incomes on an individual, annual basis.

This would see all income treated under the same rates regardless of where it is sourced from, such as earnings, savings or property rents.

The IPPR's latest report calls for changes to the tax system

The IPPR adds marginal tax bands should be replaced with a “formula-based” system, which would mean every taxpayer’s precise level of income would be key to what their rate is – with the group’s report noting that “in effect, tax bands would no longer exist”.

Its calculations claim more than 80% of taxpayers could see an increase in their income after tax income, adding there could be “gains around the median income for all taxpayers as high as £1,200 a year” – although it also suggests they could be lower.

The report, entitled “Tapering Over the Tax: Reforming taxation of income in the UK”, adds: “At the same time, a reformed system would have significant revenue-raising potential.

“Illustrative modelling shows that the reformed system could raise between £6 to £16 billion in extra annual revenue while still increasing post-tax incomes for at least 75 per cent of individual taxpayers.”

The IPPR says the new system could help everyone earning fewer than £44,400 could see their average tax rate fall.

IPPR senior economic analyst Alfie Stirling, author of the report, said: “The UK’s system of taxing incomes is not progressive enough, too inefficient and poorly equipped to raise the revenue that will almost certainly be needed to meet the public spending challenges of the 21st century.

“By combining income tax with national insurance, and replacing most tax bands with a constant, gradual increase in the marginal rate of tax, our proposal would allow policy makers to give significant sums back to low and middle earners while still raising funds to plug deficits in our public services.”

Shadow Treasury minister Peter Dowd said: “This important research from IPPR highlights the need for a progressive tax system to deal with the grossly unequal distribution of income in this country.”